What is/are the purpose/purposes of the `Marginal Cost of Funds based Lending Rate (MCLR)’ announced by RBI?
- These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances.
- These guidelines help ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.
Select the correct answer using the code given below.
Correct Answer: Option C
The Marginal Cost of Funds based Lending Rate (MCLR) is the new benchmark lending rate for banks when lending to new borrowers.
Statement 1: MCLR calculation considers banks' marginal cost of funds (interest paid on borrowed money), return on equity (bank profitability), and other risks and costs.
The MCLR is revised monthly, incorporating factors like the repo rate and other borrowing rates, which were not explicitly considered under the previous base rate system. Banks are required to publicly disclose all MCLR rates periodically, enhancing transparency.
Therefore, statement 1 is correct.
The RBI expects this new formula to make floating lending rates more responsive to policy rate cuts.
Statement 2: Based on the MCLR, interest rates are determined for different customer types based on their risk profiles. This aims to ensure fairness for both borrowers and banks.
Therefore, statement 2 is correct.
Hence, both statements 1 and 2 are correct.
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